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Whipping up interest in new dominant theme

The 2007-2008 bear market has exposed a number of investment myths and gored a few sacred cows.

Buy and hold seems to be dead. This investment strategy is based on the view that in the long run, financial markets give a good rate of return despite periods of volatility or decline. I guess in the long-run even salt is a good investment.

The idea that value investing is safer than growth investing turned out to be a myth; value investors got slaughtered in the last quarter of 2008.

The idea that gold stocks would protect a portfolio during a financial crisis turned out to be a myth. During the midst of the September-October 2008 Lehman Brothers Bros. financial panic, most banking and gold stocks posted new 52-week lows.

The reality is that investment myths and sacred cows always come under scrutiny during long periods of flat and directionless stock markets that are interrupted by the occasional crisis. Technical analysts refer to these "difficult" periods as secular downtrends.

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Secular trends are long-term trends up or down that can persist for several years. These long trends are interrupted by the shorter, four-year bull and bear cycle, hence the term.

The first modern secular uptrend was the post-World War II boom of 1949 through 1966. It ended when the Nifty Fifty buy-and-hold asset bubble popped in response to rising oil prices. This introduced the first modern secular downtrend that persisted though the 1970s. The crisis was the 1973 Arab Oil Embargo.

Secular downtrends tend to end the current dominant theme, in this case the Nifty Fifty, and in the midst of crisis and chaos they will introduce a new dominant theme. The theme to emerge during the 1970's secular down period was the "New Economy," as innovation produced the likes of Microsoft Corp., Intel Corp. and Apple Inc. Super-retailers were also born; think Wal-Mart Stores Inc.

In the early 1980s, the new-economy companies took flight and the great 1982-2000 second modern secular uptrend was on. All investors had to do was buy and hold. Today, the tech-laden Nasdaq composite at the 1,800 level is still nine times the 1982 level of under 200 on the index.

I am sure we all recall the 2000-2002 tech crash that effectively ended the great 1982-2000 advance.

Say `hello' to our second modern 2000-2012 secular downtrend.

The challenge is to seek out the opportunity in a stock market that has contained three asset bubbles and one crisis over the past nine years. Keep in mind the 1970's secular down only had one bubble, Nifty Fifty, followed by one crisis, the Arab Oil Embargo.

The identity of the new dominant theme becomes apparent when we examine the timing of recent asset bubbles – the 2000-2002 technology bubble, the 2006-2007 housing bubble and the (surprise) 2008 crude oil bubble – along with the reaction to a crisis, in this case, the banking crisis.

Our chart displays the 2008 crude bubble. The upper plot is that of the weekly closes of crude plotted above the weekly closes of the NYSE-listed Energy Select Sector SPDR Fund, populated by firms that primarily develop and produce oil and gas and provide drilling and other services.

Our chart sets out a bearish scenario that may surprise energy bulls.The energy stocks are not reacting favourably to any rise in crude prices. Note the great advance in crude – more than 170 per cent – from early 2007 to the price spike (or bubble) of mid-2008. Over the same period, the energy index advanced 65 per cent.

The underperformance occurred a second time during the recent rebound in crude from the March 2009 lows – a gain of more than 30 per cent. Over the same period the energy index advanced only 20 per cent. Even more alarming is the current price of the index sitting below the January 2007 levels.

Clearly, the energy complex is not our new dominant theme. I believe I know the next dominant theme – but I also invite your opinion.

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